1987 (11) TMI 125 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of fees paid to a non-resident company as technical fees u/s 9(1)(vii).
2. Quantum of technical fees to be taxed.
3. Application of grossing up principle for tax calculation.

Summary:

Issue 1: Taxability of Fees as Technical Fees u/s 9(1)(vii)
The primary issue was whether the fees paid by the Indian company (NMDC) to the non-resident company (DEMAG) could be considered as technical fees u/s 9(1)(vii). The Tribunal held that the fees paid to DEMAG for the services of their Engineer, who was sent to rectify defects in machinery, constituted technical fees. The Tribunal emphasized that Explanation 2 to section 9(1)(vii) includes the provision of services of technical or other personnel, thus expanding the scope of technical services. The Tribunal rejected the argument that the services were merely repairs and not consultancy, noting that both DEMAG and NMDC had treated the services as consultancy work in their correspondence.

Issue 2: Quantum of Technical Fees to be Taxed
The Tribunal addressed the quantum of technical fees, rejecting the department's contention that all expenditures incurred by NMDC, including air fare and daily allowances, should be considered as technical fees. The Tribunal held that only the payment for services at the rate of DM 565 per day, totaling Rs. 1,32,072, could be brought to tax. The Tribunal reasoned that incidental expenses like air fare and daily allowances, which were reimbursements, could not be treated as technical fees. The Tribunal emphasized that section 9(1)(vii) should be strictly construed, and only the agreed technical fees should be taxed.

Issue 3: Application of Grossing Up Principle
The Tribunal upheld the Income-tax Officer's application of the grossing up principle for tax calculation. The Tribunal noted that the contract stipulated that NMDC would bear the income-tax liability, implying that the technical fees should be grossed up to ensure DEMAG received the net amount stipulated in the contract. The Tribunal referred to section 28(iv) and relevant case law, concluding that the benefit of passing on the tax liability to NMDC must be included in the assessment. The Tribunal demonstrated through arithmetic examples that grossing up was necessary to accurately reflect the tax liability and upheld the method of grossing up receipts for tax calculation.

Conclusion:
The appeal was partly allowed, with the Tribunal holding that only Rs. 1,32,072 could be taxed as technical fees, and the grossing up principle was correctly applied for tax calculation.